Investing in Impact Enterprises: Three Principles for Newcomers to Impact Investing

Most of us enjoy a good burger. But we sometimes feel guilty about the impact of all that beef on the environment. Should we stop eating our beloved burgers?

Tech start-up PastureMap has a different answer. PastureMap created an app that helps farmers plan grazing, raise more beef, make a profit, cut carbon – and reduce our burger guilt. When cattle spend a lifetime on native grasslands and are rotated strategically, ranchers can profitably produce beef that restores native grasslands, builds healthy soil and is carbon neutral.

PastureMap is an example of an impact enterprise, a for-profit business that seeks to solve social or environmental challenges by harnessing market forces. And investors seem to agree with the sustainability of PastureMap's model. The company states, “We are fortunate to be funded by a group of likeminded and impact-driven investors who enable us to keep building valuable tools to serve the ranching community.”

Impact investing continues to grow rapidly, and opportunities abound for investors to put capital markets to work addressing social and environmental challenges. Deep impact investing with social entrepreneurs provides a rewarding way to add a sense of purpose to investing strategies.

As this brand of impact investing has become more popular and prominent, investors should bear in mind a few guiding principles.

Go big or go home

Most nonprofits are eager for a gift of any size – even a dollar. Smart impact investors understand that impact entrepreneurs have unique challenges raising capital and they need investments of a size that can have a significant effect on the success of their businesses.

Impact entrepreneurs often get caught in a fund raising trap. Many don’t fit easily into normal funding channels. Some need patient capital. For those tracking unconventional business metrics, the lack of comparables makes them harder to understand for VCs and other traditional investors.

A bigger investment from an impact investor means entrepreneurs have more time to focus on running a profitable and impactful business, which is obviously in the investor’s interest.

Aggregating investors can spread the burden of sourcing and supporting these investments. There are a number of formal and informal networks that have been created to help investors come together, invest, and promote social change. Toniic, Social Venture Network, and Investors’ Circle are just a few.

The ImpactAssets Giving Fund, a donor advised fund, can enable multiple individuals to join forces. For its investment in PastureMap, for example, the Silicon Valley Social Venture Fund, or SV2, used the Giving Fund to enable its members to try out impact investing using dollars that had been combined and already set aside for charitable purposes.

Match your investment to your goals

Impact investing, by its nature, is a blurring of philanthropy and investing. Investors need to do more homework to ensure that the investment vehicle they have chosen can meet both their impact and financial goals.

Convertible debt, which operates as debt initially and then converts to equity at a discounted price, is the most typical structure. However, some impact investors and accelerators are utilizing other structures to foster growth in these early-stage businesses.

Echoing Green’s new Seed Impact Investment Template or SeedIIT was created for investors who are more interested in the mission of a company than in earning a VC-type return. The template features no valuation cap and a longer runway before conversion, ensuring a long-term commitment from the investor. Loans and revenue-share investments are also being used by impact investors and mission-focused accelerators who want to help entrepreneurs keep their equity and maintain control of their companies (see, “New Templates Make Impact a Standard Part of Investment Deals“).

There is no one wrong or right way to structure all impact investments. The important thing is to ensure that the structure supports the impact and financial goals of investors and entrepreneurs.

Begin where you are

If you are ready to dive into direct investing in impact enterprises, start with what you know. If you represent a foundation, look at your grantees. Do any of them include revenue-generating social enterprises?

A loan to a nonprofit’s social enterprise can provide growth capital and free up philanthropic dollars to support direct charitable activities. As an existing funder, you have excellent insight into the organization’s management, operations and community impact and can likely provide additional non-monetary supports to help the business succeed.

Angel investors who are new to impact investing can consider investing through a donor advised fund. Investing with charitable dollars allows you to dip your toes into the impact investing space with funds that have previously been set aside to achieve social or environmental goals. In SV2's case, one member created their own donor advised fund at ImpactAssets specifically to recommend a co-investment in PastureMap.

The investment has high-impact potential. Christine Su, the founder and CEO of PastureMap, cites research that healthier grass can sequester up to one ton of carbon per acre. The potential across America is huge – the equivalent carbon offset as taking 200 million vehicles off the road.

“Sustainability isn't just a niche movement,” says Su, a 2016 Echoing Green fellow.  “It's the future of farming.”

Disclosure

ImpactAlpha Inc., the publisher of ImpactAlpha, has a business relationship with ImpactAssets, which is an investor of record on behalf of the Giving Fund, a donor-advised fund. 

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